While theoretically the net cast by chain of responsibility laws is extremely wide, entities can reduce their risk profile by having in place systems and clear documentation.
On 27 January 2017, the Queensland Government approved by regulation the statutory guideline (the Guideline) for the "chain of responsibility" laws under the Environmental Protection Act 1994. The Guideline aims to provide more certainty in the decision-making process for issuing an environmental protection order (EPO) to a "related person".
A "related person" can be liable for environmental compliance
Early in 2016, the Act was amended to allow the chief executive to issue an EPO to a "related person". The objective of the amendments was to facilitate enhanced environmental protection for sites operated by companies in financial difficulty and avoid the State bearing the costs for managing and rehabilitating sites in financial difficulty. The amendments allow the State to issue an EPO to a "related person" who has a "relevant connection" with the company. A "relevant connection" may exist where a person has received a significant financial benefit, from a company's activities, or is (or was) in a position to influence the company's compliance with the Act. A "related person" includes a holding company, landowners (other than for resource activities), associated entities and a person that the chief executive of the Department of Environment and Heritage Protection decides has a "relevant connection" with the company.
In response to concerns raised about the breadth of the definition of a "related person", the amendments to the Act also provided for a guideline to clarify how the decision to issue an EPO to a related person would be made. In particular, the Guideline is intended to provide clarity in determining what is a "significant financial benefit" and a "position to influence".
Under the Act, the chief executive must have regard to the Guideline in deciding whether to issue an EPO to a related person.
Key principles for enforcement
The Guideline identifies key enforcement principles, including:
- culpability will need to be established prior to a related person receiving an EPO;
- a related person EPO will only be considered where the primary company at fault has avoided, or attempted to avoid, its environmental obligations;
- where there are a number of "related persons", there is no pre-determined order in which related persons will be pursued;
- enforcement action taken will be proportionate to the seriousness of the matter; and
- a security or bank guarantee will not be required under an EPO, where the EPO relates to the same matter for which financial assurance is already held, provided it is sufficient to cover the cost of complying with the requirements of the EPO - in that case the security or bank guarantee will only be for the shortfall.
A position to influence?
The Guideline identifies that a "position to influence" may occur where a person is acting in an official (eg. appointed company director) or unofficial (eg. someone acting as a shadow director) capacity.
Relevant factors that will be considered in determining whether a person has a "position to influence" are:
- the nature and duration of the relationship between the person and the company;
- the potential for the person to make decisions to direct the company’s conduct;
- the potential for the person to provide advice or expertise in order to influence the company’s conduct; and
- any implications of other legislation or law on the exercise of powers by the related person (such as the Corporations Act 2001 (Cth)).
Examples of a "position of influence" include the ability to direct funds to particular activities (eg. prevention of environmental harm). The Guideline provides specific examples for financial advisors or banks which provide funds - where the institution is not in a position to direct how money is applied, it is unlikely that the institution could be said to be in a "position of influence".
Contractors who do not discharge their contractual responsibilities and who cause harm may face liability. However a contractor whose services are discontinued by the company is unlikely to be in a position to influence how the company complies with its environmental obligations.
Significant financial benefit?
The Guideline states that determining a financial benefit will largely be a matter of fact (eg. a shareholding exists) and the more complex issue is what is "significant".
The following may be considered in determining what is "significant":
- the proportion of the benefit relative to the total assets or benefit available from the activities carried out under the company's environmental authority; or
- the proportion of the benefit relative to the costs of restoring or rehabilitating the environment, or of protecting the environment from harm; or
- the abnormality of the benefit received as a wage above normal market value.
An arm's length transaction is unlikely to be considered a significant financial benefit. For example, a salary or fees for goods or services at market value will not be a significant financial benefit.
However, parties who enter into uncommercial transactions with a company, or who have large shareholdings with profits that are significant by comparison to the company's annual net profit from the preceding year may be considered to have a "significant financial benefit". The proportion of financial benefit from the company in proportion to an entity's total income is irrelevant.
General considerations for issuing an EPO
The Guideline states that a related person EPO will only be considered when:
- the company has avoided, or attempted to avoid, its environmental obligations and the related person has participated in this conduct (ie. is culpable); and
- enforcement action against the EA holder or operator of the ERA is not available; or
- enforcement action against the EA holder or operator of the ERA will not achieve restoration of the environment or the protection of the environment from harm.
The Guideline recognises it is not always appropriate to pursue all related persons and where there are multiple "related persons", the relative culpability of each related person will be considered.
Where a related person is considered culpable but undertook "all reasonable steps in the circumstances", a related person EPO will not be issued. What will satisfy this standard will depend on the relevant facts and circumstances in light of the nature of the relationship between the company and the related person, however, the following should be considered:
- the state of knowledge at the time, and in the lead up to, the issue or incident; and
- the foreseeability and probability of the issue or incident occurring.
Should two or more related persons be considered culpable for an issue or incident and who failed to take all reasonable steps, these related persons may be held jointly and severally liable for compliance with an EPO, including costs.
Further information and advice
Where appropriate, examples are used in the Guideline to provide contextual information concerning the operation of the "chain of responsibility laws". While this provides a level of certainty about what entities may be exposed to a related person EPO, what the Guideline really does is reinforce the importance of entities exercising due diligence and environmental responsibility in their management of dealings with companies.
While theoretically the net cast by these laws is extremely wide, the Guidelines and the precedents set by the regulator, in issuing related persons EPOs, will be determinative of risk. Entities can take steps to reduce their risk profile by having in place systems that demonstrate that they have taken all reasonable steps in managing environmental risk, including in their dealings with third parties, and by having clear documentation about directions and responsibilities relevant to environmental protection, compliance and restoration.